A country's economy is dependent on two factors, namely production and consumption by its population. Whatever be the ratio of consumption and production all the activities are carried out in a specific currency. In layman's terms, the exchange of currency against goods and services with different nations is called foreign exchange. Section 2(i) defines Foreign exchange as foreign currency including various instruments of negotiation such as drafts, balances payable, bill of exchange whether drawn in India or outside India, and payable in the form of a foreign currency or Indian currency, respectively.[1] But the foreign exchange in the general sense is not just limited to negotiable instruments, but can also be done using foreign securities or immovable property in foreign countries.
The regulation and management of the trade and foreign exchange are done using certain enactments that reflect its economic policy. To understand the importance of FEMA, 1999 its history and evolution needs to be understood first. In 1947, after India attained independence its economy was about to take a quantum leap. Despite been called the golden bird, the newly independent India had lost its charm and wealth during British Rule. Thus, the then Prime Minister decided to keep a reserved approach and marked the beginning of a self-sustainable Indian economy avoiding economic enslavement. The majority of employment being in the primary sector helped produce sufficient material for itself. This resulted in the enactment of the Foreign Exchange Regulation Act (FERA), 1947 which was temporary for time being and was made permanent in 1957. As industries flourished in India there was an inflow of foreign exchange and FERA, 1947 was replaced with FERA, 1973to protect and conserve its foreign reserves. Its main objectives were to prevent the outflow of Indian currency, to regulate transactions or dealings in foreign exchange or securities, import and export of goods and services, and employment of foreign companies and citizens in our country making the whole economy end to end encrypted by the act. The provisions of the act were challenging to follow and their violation was made a criminal offense which made it difficult for the foreign nationals to invest in India and for the Indian residents to acquire immovable property outside India. FERA created a flourishing black market in foreign exchange giving and making ‘HAVALA’ a part of the system.[2]
In 1992-93 budget speech announced some changes which were implemented by FEMA, 1999. They were focused on opening up the economy to accommodate more and more foreign companies and individuals. Its main objective according to the act is “facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”.[3]
The salient features of the act are:
- It diluted the definition of a resident of India from a citizen of India to a person residing in here for at least 180 days, widening the sample space of people administered by it and allowed him to possess immovable properties outside India and to trade in foreign securities and foreign currency.
- It wide opened the doors of the Indian economy for foreign nationals to promote technological advancements and development over the country with the help of Foreign Direct Investment (FDI).
- It was in furtherance of Liberalization, Privatization, and Globalization (LPG) policy.
- Its provisions if violated attracted civil liability and were compoundable, but they were not bound by the Civil Procedure Code, 1873.
- A separate entity Enforcement Directorate investigates the contraventions of the act.
- The limit for permitting overdraft against NRI accounts balance has been raised from 20,000 to 50,000.[4]
Thus we can easily conclude that FEMA, 1999 played a crucial role in expanding the economy of the nation and is still helping it to achieve the 5 trillion GDP mark.
About the Author: This note is prepared by Mr Rajat Gupta, a law graduate from Law School, Banaras Hindu University, and is an intern at MyLawman. He can be reached at rajatgupta@rocketmail.com
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